PM End of Week Market Commentary - 8/17/2013

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Gold finished Friday up $14.10 on average volume to 1375, with silver up $0.25 to 23.18 on heavy volume. The gold/silver ratio dropped to 59.31. Silver's 50 day MA has flattened and is beginning to turn up. The last time silver's 50 MA was moving up was mid-November 2012. Silver has moved up 8 straight days in a row; the move is getting a bit extended, and may be due for a rest.

Over the week gold is up $62 [+4.72%] while silver is up $2.67 [+13.04%].

The dollar this week was largely neutral, up 0.19 [0.24%] to 81.35. The dollar remains in a medium term downtrend; as always, moves down in the buck are generally supportive of PM prices, while moves up will provide headwinds.

I use gold/silver ratio (GSR) as a trend indicator for PM; a dropping GSR I see as good for PM overall. The GSR broke below its 50 day MA last week, and this week it continued to plummet. You can see the 50 day MA of the GSR starting to turn down along with the 20 EMA, and even the 200 day MA is beginning to flatten a bit. During the heights of silver in 2011, the GSR was right around 30, so while the current move is quite strong, we are by no means approaching a low.

Mining shares had a great week, with heavy volume all week long. The gold, silver, and junior miner ETFs were all up quite strongly: GDX was up +12.54%, SIL +15.56% and GDXJ +17.65%. Volume was extremely heavy in many names, and with the ETFs as well. There's nothing I like to see more than big price moves on heavy volume. However, on Friday miners looked a bit tired. Even moderate moves up in PM were unable to get the miners overall as a group to lift, which when combined with heavy volume I interpret as distribution, a somewhat bearish indication. GDX was off -2.10% for the day.

After such large gains this week, some selling is to be expected. Is this the start of a larger correction? Possibly, but the heavy downside volume is still lower than Thursday's upside volume so we may have further to go on this leg up. Still, its important to remember that markets do not move in a straight line up, in spite of what we've come to expect from silver over the past 8 trading days. Corrections/dips are inevitable.

Sentiment & Seasonal Factors

Three funds reported that they had sold off large positions in gold during the 2nd quarter 2013. Paulson cut his GLD stake by 50%, while some others sold their entire GLD holdings. When gold believers sell during a massive move down, it can be viewed as capitulation, which is a generally positive signal. It would have been even better if Paulson had sold all his gold.

Seasonally, the latter half of August, September and then November-February are strong months for PM. Bias should be up for the next few months.

Physical Supply Indicators

* Gold premiums in Shanghai decreased $6.23, closing the week at a premium of $7.42.

* The GLD ETF gained 4.19 tons of gold this week.

* The COMEX lost -0.66 tons of gold this week, initially losing big on Monday but gaining gold during the week.

* LBMA GOFO rates were unchanged at -0.11%, surprising given the large increase in the price of gold.

* Premium/Discount to NAV: CEF -2.50%, PHYS +0.12%, PSLV +3.21%, all three up over last week, signs of improving investor demand.

With PSLV and PHYS moving into premium, western physical ETF buyers are at least halfway back on board. CEF is still lagging, but it is much improved off the -7% levels seen at the 1180 lows. Shanghai premiums have fallen substantially, and will likely move flat if gold rises much further. It appears rising prices have reduced supply issues in asia somewhat.

Futures Positioning

The COT report for gold (data through COB Tuesday) shows the Producer category (generally miners and others in industry) reduced perhaps 3000 long contracts this week, but still remains near historic highs, and it is still a very bullish indicator.

Moving Average Current Trends [20 EMA, 50 MA, 200 MA]

Gold: short term UP, medium term DOWN, long term DOWN

Silver: short term UP, medium term NEUTRAL, long term DOWN

Silver 50 day MA moved from down to flat; if you look closely enough, perhaps it is even up. Along with the plummeting GSR, this is a bullish sign.

Summary

Physical supply indicators suggest demand for physical gold is still outpacing available supply at current prices but demand in asia is slowing. Medium term trends in PM prices are gradually changing from down, to flat, to up. Futures positioning remains positive. Investors in the west are returning to the physical PM ETFs. Mining shares have exploded higher on high volume, while the dollar has remained neutral while in a medium term downtrend. Silver is leading gold, also on high and generally increasing volume.

Its a positive picture, and anecdotal evidence suggests the bullion banks have a vested interest in prices continuing to move up. Trends in motion tend to stay in motion; unless the shorts get some evidence of fading buy-side interest, and downside volume reappears, the trend remains up.

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28 Comments

The dollar this week was largely neutral, up 0.19 [0.24%] to 81.35. The dollar remains in a medium term downtrend; as always, moves down in the buck are generally supportive of PM prices, while moves up will provide headwinds.

But, the real action was in US interest rates, where the 10-year settled at 2.83%. Interest rates have been rising fast, and the TIC data suggests that foreign nations have been repudiating our debt of late;

As the just released TIC data report indicates, in June foreigners, both private and official, were hitting every bid they could find. Literally. For the first month ever, every single security class was sold off: Corporate stocks: sold - $26.8 billion; Corporate Bonds - sold $5.0 billion; Agencies: - sold $5.2 billion, and, perhaps the culprit of it all, Treasuries, saw the biggest dump ever, as foreigners sold an epic $40.8 billion! Adding across the various asset classes, the consolidated foreign sale in June 2013 was worse than Lehman and the month after it.

Somehow to foreigners, Bernanke's Taper Tantrum was a more shocking event than the biggest bankrtupcy filing in history (one which launched the global central bank scramble to buy up everything that is not nailed down).

So is it really surprising that GOFO is still negative? Is it really surprising that this move off of a highly suppressed low price has not released enough Gold for sale to bring (real physical) supply from the mostly strong hands that hold it? No, it is not.

Dave, you are conflating the ETF sales/purchases and Comex action with actual physical supply.. Paulson selling his GLD does not make more 400 oz. bars of Gold available to the market. GOFO is a reflection of the availability and desirability of real, physical, deliverable Gold vs. the Dollar.. and it continues to signal that the dollar is trash and that nobody is selling their actual Gold bars. Gold, the lump of metal that does not, should not, yield... is yielding more interest than dollars! Comex contracts being sold does not equal Gold bars being sold... it equals promises of Gold bars, and the faith is slowly but surely being lost in these promises.

The above chart is Ben's dilemma.. if he tapers.. then he accelerates this front-running bond sell-off. If he doesn't.. then there can't be any more definite signal to the Gold market that the gig is up, and QE will never end. How high would the price of Gold in dollars actually have to go in order to get some bonified selling to occur? That is a good question... and I think we will find out in the next year or so.

For alternative technical trading views that just happen to comport with my own fundamentally based views, one can go here;

Anyone with a modicum of common sense knew that printing trillions of dollars was going to eventually have consequences. There is no escaping the inevitable; if you aggressively debase your currency eventually you are going to have a currency crisis. The first one has now begun.

Over the next 3-4 months the dollar is going to test the lower trend line of the megaphone topping pattern and ultimately break through. When it does we are going to witness a spectacular collapse in the dollar, probably testing the 2011 bottom by the next intermediate cycle low due in November.....

This is going to cause all kinds of problems. We are already seeing the bond market breaking free of Fed manipulation. This will only get worse as bonds recognize the severity of the crisis ahead. Ironically the Fed is going to print harder and faster to try and tame the bond market. It will have the reverse effect. It will just accelerate the dollar collapse which, in turn, will intensify the selling in bonds.

I agree that a great deal of real action happened in the treasury markets. Its a huge, trillion-dollar market, and when it decides to move, its a big deal. I think the bond market may well trend down until some exogenous event occurs, and this will most definitely make waves. The outcome? We'll know more after Merkel's election. I'm not all-seeing enough to know with certainty what the outcome will be.

As for your favorite trader's advice - I have my methods, and he has his. I'm not a huge fan of a thought process that ends up projecting 100% certain outcomes, mostly because (false) certainty has ended up biting me hard in the past, and as they say once bitten, twice shy.

As a thought experiment, let me rephrase what he's predicting, with his this-came-from-God 100% guaranteed outcome writing style full of definitive "will", "is", and "when" statements:

* we will have a currency crisis, caused by money printing

* it will happen within 3-4 months; in that time, the buck will break dramatically lower

* it will hit 72 by November

* the Fed will print more

* this will accelerate the dollar collapse, breaking the buck below 72

* and then bonds will collapse

So forget gold, the 100% sure-thing-moneymaker trade is, short bonds, short dollar. Lever up, can't miss, buy puts (UUP, TLT, December 2013) and you'll be rich. End of story.

Please understand. It's not his scenario that bugs me. I actually agree with the scenario. Its his apparent certaintyof outcome in that timeframe that bothers me.

In my mind, that scenario most likely will happen in the fullness of time. But the chances of it happening in the next 3-4 months? I'd say, they're pretty remote, and they depend a great deal on circumstances outside the US that are beyond our control.

My sense is, Europe and Japan both need to crash first. Then we'll see the end-o-the-dollar thing happen. But I am not certain of this.

Everyone has to ask themselves, what sort of thinking do they prefer to listen to? Certainty, or uncertainty? Certainty is definitely more fun. Multiple choice tests have certainty. Uncertainty is messy. Nobody likes messy. What do you feel more comfortable with?

So with bond yields spiking what is happening in the wonderful world of derivatives? Will we ever know how much SHIT these guys are in, or is it impossible for a counter-party to go insolvent these days. Just not allowed, which is why all this stuff is kept off balance sheet and out of sight.

I have some questions regarding your posts, as I'm trying to learn as much as I can from them, but there are a few things I don't understand.

davefairtex wrote:

Premium/Discount to NAV: CEF -2.50%, PHYS +0.12%, PSLV +3.21%, all three up over last week, signs of improving investor demand.

I looked up NAV and now I know that it means net asset value. I understand that the ETFs that proport to hold physical bullion, such as the Sprott ETFs PHYS and PSLV, basically try to hold the equivalent amount of bullion as the total market capitizalization of all of the shares. Is a positive (or rising) premium/discount to NAV a sign that share purchases and share value is currently increasing faster than the physical bullion stock? Is this considered positive because it simply means that more people are buying the shares? I assume that Sprott will purchase bullion to make the premium/discount to NAV close to zero so that the ETF is close to100% backed by physical metal, but that in the early stages of a bull market, share purchases may increase faster than the company's ability to top off bullion stores. But, the Premium to NAV could also increase if an ETF provider was slow to increase bullion at a rate that keep up the pace with share purchases, right? So, my basic question is, is a positive movement in premium/discount to NAV a sign of improving investor demand simply because it shows that ETF shares are increasing in value faster than the ETF provider can stock up on bullion?

davefairtex wrote:

The COT report for gold (data through COB Tuesday) shows the Producer category (generally miners and others in industry) reduced perhaps 3000 long contracts this week, but still remains near historic highs, and it is still a very bullish indicator.

I have only a very basic understanding of the Commitment of Traders report, and from what I know, it's simply a report explaining the breakdown of the open interest (i.e. total number of futures contracts for a given market) across the total number of traders, ranging from commercial traders who are hedging in some way and hold actual stocks of the commodity in question, and speculative traders, who do not hold any such stocks. So, here's my best attempt to explain the significance of what you wrote above. I'd like to know to what extent I understand or don't understand your statement according to what I write:

The number of long gold futures contracts held by commercials - specifically producers of gold, such as gold miners - is near historic highs, even if it fell slightly this week. This is a bullish indicator because it shows that the mining companies believe that gold is likely to increase in value and therefore they don't feel the need to hedge as much as right now with short contracts. Hmmmm....ok, that's my best attempt, but I still feel like that attempt at an explanation is missing something, so I'd love to hear what else you might say to explain why historic highs in long gold contracts by gold producers is bullish.

Jim, my question to you is as follows: Dave listed five physical supply indicators: decreasing gold premiums in Shanghai, an increase in gold buillion held by GLD of 4.19 tons, a loss of .66 tons on the COMEX, an unchanged negative LBMA GOFO rate of -0.11%, and a positive change in the premium/discount to NAV in 3 PM ETFs. You responded with the following:

Jim H wrote:

Dave, you are conflating the ETF sales/purchases and Comex action with actual physical supply.. Paulson selling his GLD does not make more 400 oz. bars of Gold available to the market.

Can you explain why changes in physical supply in GLD and the COMEX are not indicators of actual physical supply? I am guessing it's because there is concern that these numbers are not accurately reported, but if that's not the explanation, then I'm not sure what is, and I 'd like to know.

I can't help but answer one of the Davefairtex questions... CEF/PSLV/PHYS are not, "tracking vehicles" like GLD... they are lumps of metal in non-bank vaults in Canada and you are buying shares in this lump in a trust structure... the only mechanism for aligning the share price with the NAV (i.e. 0% premium or discount to NAV) is the freemarket itself, unlike, say, GLD, where the setup, as I understand it, allows the Bullion Banks, since they are the only players who can put metal in and take it out, to play some kind of riskless arb. As you may know, PSLV has a history of high, even beyond 30% for a brief time, premiums. It is nice and normal to me to see that at least the PSLV trust is starting to see a higher premium.

Regarding the other comment... of course, the draining of GLD and Comex have meant that this supply of bars was going somewhere to meet demands... my point was that when you sell shares of GLD, or sell futures contracts short into the Comex, you are not in either case doing the equivalent of holding a 400 oz bar in the air and saying; For sale for immediate physical delivery. I guess if you are an authorized participant (in the lingo of the GLD prospectus) and you buy enough shares in the open market, you can pull some bars out... and this is indeed what has been happening... but you and I are not authorized participants.. and when we sell our GLD shares, someone else is buying them. Anyway.. this game seems to have played itself out for now and the GLD has stabilized, after being 1/3 cannabilized this year. There will be that much less flywheel for the bullion banks to play with in order to manage markets going forward.

My point to DaveF is that the Comex action does not represent what is going on in the physical supply vs demand market for big Gold bars anymore... I think he and I continue to disagree on the degree of information contained in the price action, which still, unfortunately I believe, is set by futures trading on Comex. He seemed surprised that GOFO was still negative even though price has moved up smartly off the bottom near 1180.. I am not surprised at all... the degree of supply:demand imbalance created by the manipulations of price are much more extreme than that. I will try to get into this more later. Thanks for the good discussion.

There are a number of closed-end physical PM funds; they include CEF, GTU, PHYS, PSLV and perhaps a few others I forgot. They do not include GLD and SLV. I will use CEF as my example because it is relatively simple.

At inception of the fund, there are a fixed number of ounces of gold and silver, owned by the fund, stored in a vault in Canada, along with some leftover cash for periodic expenses. Against those assets, the fund issues a fixed number of shares. The number of shares doesn't change, nor does the gold and silver in the vault. That's why it is called a "closed" end fund. So the calculation of NAV is simple:

Every quarter, the cash in the fund decreases - to pay storage fees for the PM, pay salaries for the fund administrators, and so on, so the NAV of the fund slowly shrinks in value over time. At some point if cash runs out, they will have to start selling PM from the vaults, but slowly, and just to pay expenses.

Ok, so that's NAV and fund structure. Now then, remember the supply - the number of shares are fixed, while investor interest moves up and down. So if CEF becomes a really popular PM investment vehicle, investment demand will increase the price of CEF above its NAV, so it will sell at a premium. (This happens to many other types of closed-end funds too). Sometimes the premium gets pretty absurd. A few years back, PSLV was selling for a 15 or 20% premium to NAV. The reverse can happen, when investors decide they really don't want to own PM funds anymore. The closed end funds start trading at a discount. That's where we were after the April crash. At one point you could buy $1.00 in PM for only $0.94 cents. At that point you had a choice: buy physical with a 15% premium, or buy CEF with a 6% discount. Now there are definite benefits to owning physical metal, but a 21% net premium is a pretty steep price to pay, especially when there is no doubt that CEF owns the metal in the vault. Me, I chose CEF at a discount.

So the closed end funds can increase supply by doing a "secondary offering" and sell more shares while buying more PM. It is an involved process, so it doesn't happen all that often. It also often deflates the premium, which is a significant risk to someone who buys a fund with a large premium to NAV. This happened to PSLV in the past - I think it happened twice, actually. It may have happened once to CEF too.

Now then, GLD and SLV are different beasts. They can relatively easily expand or contract the amount of bullion and the number of shares outstanding. No secondary offerings are required, it can happen every day. That's why the number of tons of GLD changes frequently.

As for the COT reports - the Producer category has historically appeared to operate like "smart money", meaning, whenever these guys reduce their short positions and head towards the long side, in the past it has signaled a low point in the market. Its not a perfect timing tool, and there's no guarantee or anything, but to me its a bit like "insider buying". This is a clue that the price is seen as cheap by insiders in the industry, and they are setting themselves up to profit from a move up in price. And they have usually been right in the past. And the signal that is showing right now is the highest I've ever seen so presumably, this is the most bullish these guys have ever been collectively.

I appreciate both of your replies, Jim and Dave. I am going to take another look at the PM ETFs that I am poised to invest in (ZKB gold and silver ETFs), with a pension fund that has a lot of limitations, so I'm happy to have found a way to be able to invest in PM in any form with this money. I think they are closed-end funds as well, but I want to understand this more clearly.

The 0.4% annual fee seems normal enough. The 3% buy-in fee seems ... steep, or at least it approximates the cost of actually buying a bar on your very own. The ability to actually take delivery is a fun addition (fees apply?) also provided by PHYS and PSLV.

I really have always wanted to take delivery. Now if I can just scrape together the $137k it will take and drop it in my futures account, I'll have a great story to tell...assuming the COMEX doesn't default in the meantime...

Last time I checked, it cost around $600 or so to have COMEX drop off a bar at some known location (a bank?) using an armored car. But that was a few years back.

This redemption was not very large but it is the first time that it has happend - that I'm aware of and I have been invested in and following PHYS and PSLV for many years.

Do you have any theories why PHYS would trade at a discount to NAV? It seems an easy arbitrage. The redemption fees are pretty low. Per the PHYS prospectus "For delivery in the continental U.S. and Canada, delivery expenses are currently estimated to be $5 per troy ounce at current rates. Current gold storage in-and-out fees are approximately $5 per bar with a minimum charge of $50" http://sprottphysicalbullion.com/media/1341/SprottPhysicalGoldTrustProspectus-US.pdf That works out to less that 0.5%.

All we need is a couple $100M for a month to take advantage of this arb opportunity. Now were can I borrow that kind of money for just a couple basis points? If only I were a TBTF, government supported bank.

When PSLV and PHYS and CEF were trading at a premium to NAV it told me that investors did not trust GLD, SLV, and COMEX and were willing to pay a premium for more certainty that unemcumbered physical was actually behind the shares. Confidence in these funds is aided by the redemption feature. But now that PHYS is at a discount I cannot believe that the perception of risk is higher. Also I heard a theory years ago when the premiums were high that the bullion banks were manipulating the shares of PSLV and PHYS higher to prevent Sprott from doing secondary offerings. Sprott went ahead and did secondaries any way, which did dilute the previous owners at the time. The share price did seem to bounce back right after the offering(s), however,

For many weeks now the close-end gold funds/trusts, such as PHYS, GTU, and CEF have been trading at a discount while the all silver fund PSLV has been trading at a premium. I think that the CEF trust has both gold and silver. So whatever is causing the discount at the gold funds is not affecting silver.

Have a great week! It will be an exciting one with interest rates on the 10 years US treasury above 2.8%

My observation is, when there is a massive selloff in gold (or silver) futures, the physical ETFs start getting dumped by investors, and they start trading at a discount to NAV. I wrote a little macro for my trading app and I can view the discount in real time. Its educational, and if you are going to make trades based on buying the discount, I recommend strongly you calculate the NAV yourself. You might find the website NAV discount/premium values to be incorrect - problematic if you are making a trade based on them.

So when there is an uptrend, CEF (and friends) start moving more towards premium. When there is a selloff, CEF and friends start moving to more of a discount. They are in some sense a measurement of the confidence a certain subgroup of investors has in PM. I'm not sure these guys are "smart money" - they seem to lag the market rather than lead it.

So in a word yes, if you are patient and believe that PM always comes back, you can buy CEF when its trading at a big discount, and then sell it months later once it returns to premium. You have to be patient, but if and when the premium returns, it really is free money. I've done this trade before; just know your ETF, what its premium and discount ranges are, and how it behaves.

I would expect premiums on PSLV and PHYS to really pop if there were a near term risk of a COMEX default. So far, it all looks pretty tame. If you believe in market signals, there's no danger of a default, at least not right now. Some expected JPM to default in August, but somehow they managed to get their hands on a few hundred thousand ounces (about one bad week at GLD) so...no default. Not this month anyway.

Currently, open interest on COMEX is about 380k contracts - about 1200 tons (38 million ounces) worth of exposure to the price of gold. PHYS has 50 tons, CEF 53 tons, GTU 19 tons, and GLD has 915 tons.

COMEX currently has 25 tons of registered gold, down from 94 tons earlier this year.

Someone asked me once what I thought the effect of a COMEX default would be. I've reflected on this. If this led to a break in confidence in the marketplace (i.e. nobody respected prices set by a cash-settled gold futures contract), pretty much the minimum effect would be that the 1200 tons worth of people that currently want exposure to the price of gold would suddenly be tossed into a marketplace where the options were about 1100 tons immediately available in the ETFs - and currently owned by others. While its true that the inventory of gold worldwide is about 175,000 tons, only about 4,500 tons of physical gold changes hands every year. So dropping 1200 tons of demand onto a marketplace with a 4500 ton annual physical trading volume and another 1100 tons of ETF gold ... it would likely lead to some big price increases.

It would be like dropping a huge buy order onto a relatively illiquid stock. Or so I think. Once prices got too absurd, people would just give up. But - how high would that have to be? $2500 gold? More?

And this is why I don't think it will happen. If you believe that the Fed really and truly engages in suppression, the absolute last thing they want to happen is for COMEX to default. All JPM needs to do is rob GLD once a month of about 7 tons, and they're good to go.

Some part of me thinks the gang at JPM reads these "imminent COMEX default goldbug" blogs and has arranged for the supply of gold at COMEX to get really low to manipulate the goldbug community. Perhaps they've linked all the ink spilled on this issue to actual changes in the price of gold - and now that they're net long in the futures markets, they are simply using the resulting froth to help them make their quarterly bonuses.

I am finding it tiresome to post here anymore... there are two ways to look at this whole picture.. on the surface, where the TBTF banks want you to look, and where DaveF skillfully analyzes, or under the surface in the murkier waters of the real world of Gold manipulation. I have recently decided to get inside the new paywall at Turd Ferguson's website, because he goes into the murkier waters. The reality is not what DaveF has posted above... the reality is very different.. to the point where one might say that Comex is already in some kind of default state today.

DaveF said,

If you believe in market signals, there's no danger of a default, at least not right now. Some expected JPM to default in August, but somehow they managed to get their hands on a few hundred thousand ounces (about one bad week at GLD) so...no default. Not this month anyway.

Let's see what Turd had to say about the August Comex deliveries yesterday.. and I post this, without a link because it is behind the paywall, with the strong suggestion that anyone with serious money tied up in PM's and mining stocks think about subscribing to the premium content for $99 per year;

The cumulative total deliveries for the last four delivery months is 37,824 contracts. During that period, JPMorgan settled (stopped) a total of 2,162 contracts directly into their proprietary (house) account. That's 5.71% of all deliveries for the past four delivery months.

This month, of the 2,965 gold deliveries made through last Thursday, JPM had stopped into their house account 2,151 of them (72%). That's interesting, isn't it? Just this month alone, JPM has stopped as many contracts for themselves as they had in the previous four months combined.

But wait, there's more...Over the past nine days (8/5 - 8/15), The Comex has delivered just 1,003 contracts and the JPM house account has stopped 945 of them. That's 94%! And now yesterday, 8/16, The Comex has no deliveries at all? Seriously??

So now, suddenly, even though global demand does not seem to be falling off, The Comex is on a run rate of just 4,000 deliveries again. Hmmm. The average total deliveries for the previous three delivery months this year is 11,524 and yet this month is coming in 60% less? Seriously??

So, there you have it. Almost all of the recent deliveries of physical Gold at the Comex have gone to ... JP Morgan. The data is factual and quantitative, based on reports from the CME itself.. the interpretation is more murky. I think most normal traders who need physical have already lost confidence in Comex. As DaveF says, TPTB don't want a Comex default... so instead, they have created a kind of body on life support.. see, the heart is still beating! Deliveries are still being made! Yeah, right. Nobody else is even trying to get phys there anymore because it is either too hard... the delays are too great.. or they are simply being talked out of it by the folks who run the Comex (do I really have to post the Kyle Bass video again?).

GOFO remains negative, in fact it became more negative on Friday. There is a deep shortage of physical Gold available for delivery in size. The fractional reserve nature of the Gold markets goes much deeper than the Comex example DaveF gives above... that is just scratching the surface of how many promises of Gold exist across the bigger world of CB Leases, swaps, unallocated accounts, allocated accounts that have been raided, and ETF's that contain some degree of paper promises vs. real physical Gold.

I don't know which way the Gold price will go on Monday. I do know that things are getting more and more wierd, that GOFO seems permanently negative, and that something, somewhere, is ultimately going to break. If you and your money are sitting on the sidelines when it breaks... you will probably not have the balls to get in afterwards.

An alternative scenario is that rising prices will cure the delivery problems at the COMEX.

Right now gold is at $1372. Shanghai premiums have dropped from a high of $30 back in early July at the dead lows of $1180, to $7 now with gold at $1372. Rising prices cured Shanghai premiums. Most likely a gold price of $1450 will cause shanghai premiums to vanish - I'm just extrapolating from the charts now. Could the same thing happen at COMEX? Is there a price level at which demand for gold delivery will drop off? I think likely, there is.

Lastly, here is a way of looking at this is based only on logic. Follow my logic and tell me where I go wrong.

JP Morgan has a big long position in COMEX futures. They are set to benefit from a rising COMEX futures price. Now there are problems at COMEX, well documented problems. That certainly sounds positive for the price of gold. I will ask CHS's favorite question: who benefits?

That would be JP Morgan.

If COMEX defaults and the futures contracts prices diverge from the price of gold? Presumably those contracts lose value. Who would be hurt? JP Morgan.

Presumably, JP Morgan has some influence over what happens at COMEX. So, do we imagine the COMEX will default while JPM owns a big long position? Logic would seem to say, no.

I will agree that curious things seem to be happening, and especially that one must be careful in selecting the provider of "paper gold" (i.e. PM ETFs are not all created equal, and unallocated gold at some random bank is most likely a bad idea - insurance that most likely won't pay off), and I believe that having a core position in PM is a sound idea. I always retain my core position, and I trade around it.

Do I think its wise to go all in right now because the chances of an imminent COMEX default are high? No, I do not. The futures markets appear to be intact - and logic would appear to support it continuing to remain intact at least for now. So at the moment, I prefer to follow futures markets supply and demand for my primary guidence as to the near term movements of gold prices while retaining my core position.

My model for a COMEX default (not the same thing as "truth", mind you, its just my idea) is that it won't happen during "normal times" but rather, at times of more extreme stress in the marketplace, when banks go under due to sovereign defaults causing issues with derivatives and/or widespread bail-ins and the like. At that point confidence may snap in institutions like COMEX and at that point it could well happen.

Then again, I could be wrong - and that's why I have my core position.

Jim, I am happy you have found a source of information that you find to be more in line with your own thinking, and I hope that whenever you find new information about these matters (such as something that you feel increases the chances of an imminent default) you post about them so that we can all be informed. I really enjoy reading and hearing about all these things, I don't dismiss any of it - I just try and fold it all into my world view and then arrive at a conclusion as to what the odds are of a particular scenario coming to pass. That's why I have that section in the weekly report about all these supply pressures - not to mollify you, but because I truly found them interesting and worth monitoring. If I didn't find them worth watching, I wouldn't write about it.

One last thing about GOFO rates. I'm curious - how much money can one make by selling gold now and taking delivery in the future? Does a rate of -0.1% mean that I can get 0.1% ROI over and above LIBOR if I were to sell a ton of gold now and take delivery of a ton of gold 3 months down the road? A shanghai premium makes sense to me - a $30 premium on a $1200 gold price means you can make $30 over the time it takes to ship that gold from GLD to Shanghai. What's the expected profit per ounce on the GOFO arbitrage trade? Is it simply 0.001 * 1372 ($1.37) over the 3 month period?

I agree with your logic about JP Morgan benefitting this way. The problem is that a bigger bet could be made behind the scenes where they benefit much more if the obvious gold bet goes against them. I don't know if this is a reality or just a possibility. I certainly wouldn't put such a ploy past them. Gold bugs are feeling it is safe to accumulate more now because JP Morgan has finally seen the light. Maybe they have, but I don't think the gold market is big enough to entice them to abandon all the other markets.

My gut tells me that they are going to be on the side of rising prices until they see a good opportunity to upset the apple cart. Then, they'll suddenly turn coat, sell their enormous position (and considerably more,) and jawbone the weak hands into dumping their positions. If they have access to information on accumulative stop-loss positions, they can factor that into their calculations. Actually, those are the weakest hands and are the easiest to manipulate.

Fundamental analysis really can't explain the takedowns we've seen this year - someone with deep pockets taking a daring position to manipulate prices does explain the majority of price swings. Why wouldn't "they" do it again? Is it just a coincidence that the big houses lowered their forecasts a week or so before someone dumped 400 tonnes into the market? That was at about 1550. Can you imagine how many traders will set stops just below that level if the price climbs above that? To me, the big question is "when is the apple cart full enough for them (or others) to do the same thing?"

As you noted about your core position, I have mine too. The core won't be touched. I've got "house money" to play with. If I'm wrong, it sets me back a bit on my overall goal. If I'm right, I'll get my goal quicker. If I didn't have a core position (at least 15% of net worth in PMs) I'd be accumulating at these prices.

Fundamental analysis really can't explain the takedowns we've seen this year - someone with deep pockets taking a daring position to manipulate prices does explain the majority of price swings

First let's go over what happened prior to the crash:

On 10 October 2012 gold hit its peak of 1798. 29 October the 20 EMA crossed the 50 MA to the downside when gold was 1711. That kicked off the downtrend. 11 November the 50 MA started moving downhill, at gold 1734, and gold would not close above the 50 MA again until seven months later, on July 23. (The inability of gold to close above its 50 MA should have been sign enough for traders with any savvy at all to realize gold was in a serious downtrend).

On Feb 13 2013 gold closed below 1650 support, and soon after that, the 50 MA crossed the 200 MA to the downside, the so-called "death cross". By early April, gold had been in a clear downtrend for 5 months making a series of 5 lower highs. It was $250 off its high. On April 9, gold's last feeble bounce off 1550 support hit its last lower high, and a few days later gold was slammed through 1550 support with a huge futures gold sale - that 500 ton deal everyone talks about.

Given that play-by-play, and gold's 5 month downtrend prior to the big smash, was this really a daring manipulative move? In retrospect, no. It was shorting into a long downtrend, right at a very serious support level. A punch-drunk fighter, after being battered for 10 rounds, finally succumbed to a vicious one-two combo midway through round 11. So what caused the knockout? The first 10 rounds of setup, or the last two punches?

My theory is, had the evil manipulators not shorted into a downtrend right at support at the end of 5 long months of downward movement, that 500 ton gold futures sale would have done exactly zip.

Now then, you suggest this whole gold move went counter to fundamental analysis and is therefore likely manipulation. I have a question for you. Whose fundamental analysis?

If you are talking about your fundamentals - about your reasons for buying gold, of course I agree. The marketplace is famous for not trading according to what each of us thinks should be happening. Its just what markets do. The trick of trading is to retain your own fundamental ideas, but not to assume that the rest of the market shares them with you. That way you will not be confused and have unhelpful thoughts like "the stupid market is completely detached from (my) fundamentals - it must be manipulated!"

This last lesson took me a long time to learn, and it was quite the expensive lesson. But now that I know it, I will never again forget it.

A thought experiment: let's assume for a moment that most of the GLD & gold futures buyers bought because they were worried about hyperinflation as a direct result of QE. Two years pass. Lots of QE, and no hyperinflation. In fact, the CPI is sub 2%. Not only no hyperinflation, but really no inflation at all. So, shall they hold gold? Perhaps not. Perhaps they should take some of that capital and buy equities, which after all are going up. Bonuses are at stake, and the fundamentals underpinning their reasons for buying just aren't true anymore. And now gold is in a downtrend. Stick with it, or rotate out of this sector, and rotate into something else? Bye bye gold, hello equities!

Is it possible that a lot of the guys that bailed prior to the crash had that mentality? I think so. Certainly, the 5 month downtrend in the gold market prior to the crash traded exactly in line with that particular fundamental outlook.

As for JPM trader waking up one morning, getting a wild hair, and deciding to sell every single futures contract they own and go short more besides - why on earth would they do that? That wouldn't make them money. They'd end up leaving a great deal of money on the table. The trader who did this would get a smaller quarterly bonus, and maybe he'd even be fired for stupidity.

If JPM wanted to go short and make money doing it, they'd likely wait for the uptrend to get tired, and then they'd sell their long position slowly, so as to maximize their gains without unduly disturbing prices. It might take them days or weeks. After all, they have a huge position, and the market can't absorb all they have to sell unless they take their time doing it. Once sold, they'd have to accumulate that short position slowly too, so as to maximize the number of contracts short at the highest possible price.

Once this "starter" short position is in place, then they'd likely wait for a downtrend to start, and then they'd start shorting the bounces, gradually increasing that position. And ultimately, once again at critical moments at or near support, they'd dump contracts onto the market driving the price through support and causing a big stop-loss-driven spike down.

Do you see how it works? At all times, they are trying to maximize their profits. Entry and exit of big positions are done slowly. Tactical positions are taken to move the market, but only to benefit the larger positions they've built up months ago at much higher price levels, and only at moments when the likelihood of success is high. And since they are not stupid traders, they trade with the trend, and not against it. That way they can make more money, with less effort.

The big money is made on the gold shorts they entered into at 1798 and all the way down, and not so much on the tactical gold shorts they sold to hammer the market through 1550.

For the big guys to enter or exit the market with their big positions, they require volume. That's why I talk so often about volume in my posts. Volume is the footprints of big money. Its especially easy to see on the relatively rare days with extremely high volume and a small price movement. At the tops, this signifies a big guy distributing. At the bottoms, its a big guy accumulating.

Thanks for the thoughful reply . . . makes sense. A default at the COMEX does seem unlikely. The bullion banks have shown an aptitude for shifting bullion from eligible to registered, as well. It is just so tempting to dream about all holders of the 1,200 tons of open interest standing for delivery at once. But then I suspect that most of the open interest is purchased on margin and they don't have all the cash needed to get physical.

I have also seen the premiums/discounts to NAV for PHYS, PSLV and CEF grow/shrink with metals price changes. Also, in the past premiums have been smashed temporarily by word of a secondary offering.

I am an investor, not a trader so will not be trying to arb any discount to NAV. But, it is a good test of one's understanding. In theory you could buy PHYS at a discount to the trusts NAV and purchase forward sale contracts (puts) at the same time. The puts would be for the same day when you could redeem the PHYS shares for bullion. Then on that day use the PHYS bullion to satisfy the put obligations and pocket the difference. Risk free money!!! Well, there is always counterparty risk.

As I write this I realize that since gold prices are currently in backwardation - it is cheaper for future delivery than for today - it limits the arb opportunity. Maybe that is a better way to value PHYS . . . as gold one month out. One month because I think that is how long the redemption process takes on average.

My theory is, had the evil manipulators not shorted into a downtrend right at support at the end of 5 long months of downward movement, that 500 ton gold futures sale would have done exactly zip.

Preposterous. 500 tons is 500 tons... sold in a short period of time, it is going to dump price and run stops. Here is an alternative view of the same sequence of events, as viewed by a technician other than DaveF (highlights are mine);

In the chart below I have indicated the highly unlikely series of events that followed Bernanke's QE 4 announcement at the December FOMC meeting. To start with gold was driven back below the key psychological $1700 level during an unnaturally high volume hit in the middle of the night. No normal trader seeking to maximize returns would dump that kind of volume into the thin overnight market.

Equally strange was the intense selling pressure that would emerge any time gold approached that $1700 level over the next two months. The fact that the dollar was moving down into an intermediate bottom during this period makes it even more unlikely this was a natural move.

The next event, and a personal highlight, was Goldman Sachs coming out with a public recommendation to sell gold short the day before the stops were run below $1520. Since when has Goldman Sachs ever been interested in making the public money? It seems much more likely that Goldman Sachs traders were already short the gold market and were looking to juice the downside as they already knew a stop run was coming.

Again the hit came with a massive futures dump, the equivalent of 500 tons of gold in the thin premarket trading where it would have the most damaging effect.

Then in late May and early June it was called to my attention that unusually large positions were being accumulated in GDX June expiration puts. At this point it wasn't surprising that gold was repeatedly prevented from closing and holding above $1400, and miraculously by the June expiration gold had collapsed by another $125 sending all of those puts deep into the money. Coincidence? I hardly think so.

Now let's assume that I'm not the only one that understands that global QE is going to have serious consequences down the road, and that those consequences are going to drive, at the very least, another large leg up in the secular gold bull market, if not the bubble phase. Let's also assume that there are at least a few traders that are not only blessed with common sense, but also with the means to temporarily influence market direction, especially in thinly traded markets like gold and silver (I suspect it's considerably more than a few, and I think we can be pretty confident in assuming that most of the big banks are included in this group).

So for the moment let's just assume that the last freely traded intermediate cycle low (bottomed in November) had been allowed to function as the springboard for what should have been another normal C-wave advance as QE ∞ got underway. Based on what transpired during the last C-wave, we would probably have seen gold rally over the next two years to somewhere around $3000-$3200. Roughly a 100% gain from the October low of $1675.

But let's assume that we aren't the only ones that recognize QE ∞ is going to eventually drive another huge leg up in the secular gold bull. Let's also assume that these big players have the means to create a bear raid in the sector and push price to artificially lower levels.

Assuming that the eventual end game is that same $3200, look what a bear raid does to one's profit potential if you know the raid is coming, and can enter close to the bottom. Instead of a 100% gain you are now looking at a 200% gain. And that's not including any profits one might make by participating in the raid on the short side.

Next, look at the massively increased profit potential that has been generated in the mining sector by this same bear raid.

I think we can expect continued small manipulations from time to time to manufacture minor sell offs and artificial daily cycle bottoms, similar to what happened last week with the Tuesday take down that stretched the daily cycle and temporarily drove gold back below $1300.

In fact I think we are probably going to experience some kind of manipulation this week as we move towards options expiration. But from now on I think these will just be brief to tangle cycle counts, or run short term stops, and allow big money insiders slightly better entries. The major manipulation is complete. It has accomplished its goal.

In my opinion, the last eight months had nothing to do with the Fed trying to suppress the price of gold, and only a little bit to do with moving physical metal from west to east.

As usual, this was mostly about big-money insiders manipulating the market to generate maximum profit potential during the next leg of the secular bull market (which in my opinion will probably turn out to be the bubble phase of the bull market). They've managed to lower the starting point considerably below the natural bottom in October of $1675. The bear raid has massively increased the upside percentage potential during the next leg of the bull market, along with generating some pretty decent short side gains as they set up what I expect will be the trade of the decade.

Let's get real... the Rupee is crashing hard. Inflation is hitting in India. Maybe this is the black swan we have been wondering about. The FED is losing control of bond yields... the difference in interest on $17 Trillion of debt we have as a result of the recent rise in rates is equivalent to $170B.. this is going to blow a hole in the US budget like you have not imagined... you think that the FED is going to be able to taper into this trend?

That being said, I am mostly out of Gold and miners right now, anticipating a hit associated with tomorrow's meeting between bankers, regulators, and Obama. Too risky for me. I will be right back in after that. I hate being a day trader.. but I don't see any alternative right now.

On the morning of September 6, 2011, traders all over the world watched their screens as gold climbed higher towards $1920 per ounce. It was known that the Swiss government was going to make an important announcement at what was 3:00am Eastern Standard Time, and the press had prepared the public with hints that the Swiss were going to devalue. Five minutes BEFORE the Swiss announcement – just five minutes prior to an enormously gold-bullish announcement that would have had traders everywhere frantically buying – tons of paper gold were dumped on the market and gold price was rocked for an 80$ loss in a matter of minutes.

Everyone watching was shocked at the action (supposing that someone was front-running a Swiss announement that no, they weren’t going to devalue), and then were even more confused when the Swiss did in fact announce the Euro peg. But no matter: the massive pre-emptive strike confused gold traders and completely diffused what was assuredly going to be new all-time highs for gold.

Don’t believe me? Here is the chart of the Swissie showing the precise moment at 3:00am when the announcement was made.

Now here is the gold chart- note the massive dump five minutes BEFORE the announcement.

This was not some insider front-running the news, because the actual announcement was wildly gold-bullish, not bearish. Nope, this was some insider deliberately drowning what was shaping up as a massive rally in gold at an important technical level BEFORE the news was released. I dare anyone to explain this market action absent manipulation.

Aug 19 (Reuters) - Britain's gold exports to Switzerland surged in the first half of this year, Australian bank Macquarie said on Monday, suggesting bullion being sold out of exchange-traded funds may be heading for Swiss refineries before being sold on in Asia.

The UK exported 240 tonnes of gold to Switzerland in May alone, while its exports over the first half of this year totalled 797 tonnes, Macquarie said in a note.

In contrast, Britain exported just 92 tonnes of bullion to Switzerland in the whole of last year, it said.

"The UK does not have gold mines, so where has it all come from? The obvious source is the gold exchange-traded funds (ETFs), most of which hold their gold holdings in London vaults, and which saw huge outflows in 1H 2013," Macquarie said.

"And why is it going to Switzerland? Two explanations make sense. One would be that investors have decided to switch their gold investments from ETFs to allocated deposit accounts, which are often held in Switzerland."

It added: "But a bigger factor, we think, is that the gold bars from ETFs have gone to Switzerland, where most of the worlds gold refining capacity is, to be remelted into different size bars and coins and then sold on end consumers, predominantly in Asia, specifically China and India."

Gold ETFs - popular investment vehicles which issue securities backed by physical gold - posted their biggest outflows of metal on record in the second quarter. Data from the World Gold Council showed outflows of 402.2 tonnes of bullion between April and June.

Holdings of the largest gold ETF, New York's SPDR Gold Shares, are held in allocated 400-ounce bars in the London vaults of HSBC, according to the fund's website.

It is an interesting question - did the big guys manufacture the trend, or did they simply take advantage of it? I have my idea, he has his - no actual proof beyond a reasonable doubt is possible, so who am I to argue the case?

The good news is, any way you slice it, as a small fish its a good idea to trade with the visible trend rather than against it. To me it shows that, regardless of your particular viewpoint as to how the trend came to be, it is foolish in the extreme to trade against it. Selling those moving average breakdowns would seem to have been a good idea regardless of whose story is correct, don't you think? And buying the upturns - also a good idea, yes? That way we too can be set up for that 700% gain, just like the big guys. That outcome sure sounds good to me.

We all have our quasi-religious viewpoints (me included) as to why the trend came into being. However, at the end of the day its really not important why; just trade the blasted thing, and we can all make money.

Of course if you (or I) get all caught up in our own personal idea of why the market should be moving and be angry when it doesn't move the way we think it should at the time we think it should, we run the risk of ignoring the trends and...ouch. That's usually expensive to do.

I should go re-read the Tao of Pooh. There are some great lessons about going with the flow, about accepting that things are as they are, not tiring yourself out by madly trying to swim upstream, and so on. If one can release ego - the ego that we all feel, that whispers in our ear "I know the fundamentals, and they must move the market in the following way" - one is better able to see the direction the market is actually taking, and go with that flow.

If you thought that PHYS was going to increase its premium to NAV, a very simple trade that would remove the risk of the underlying gold price allowing you to just capture the premium move, you would go long PHYS and short GLD in equal dollar amounts. You'd be neutral gold, and long PHYS NAV premium/discount.

I've done this before. It takes a while to play out - months, usually. But if you buy in after the big smashes, you can make 3-4% "pretty much" risk free over the course of a few months. (I say pretty much because if another smash happens, the spread may widen further, which likely extends your waiting period by another few months.)

Lastly, here is a way of looking at this is based only on logic. Follow my logic and tell me where I go wrong.

Dave,

Perhaps this joke will illustrate the situation that I was trying to describe. Remember, we can only see the results of their actions after the fact.

Bill walks into a bar and sits down next to a patron at the end of the bar. He strikes up a conversation and after a few minutes asks the man (Jeff) if he would like to engage in a friendly bet for a beer. Jeff asks what the bet is? Bill bets him that he can bite his eye. Jeff knows it is a setup, but it is only for a beer so he accepts the bet. Then, Bill pulls out his glass eye, puts it in his mouth, and bites it. Jeff laughs and signals to the barkeep to bring him a beer for his friend. The bartender brings the beer with a scowl on his face.

Bill drinks his beer and continues to talk with Jeff. He suggests another bet. He bets Jeff 10 bucks he can bite his other eye. Jeff is wondering what the catch is. He reasons that Bill can't have 2 glass eyes and asks if he is going to bite that eye with those teeth. Again, he knows it is a setup, but it is only 10 bucks so he accepts. Then, Bill pulls his false teeth and bites his other eye. Jeff grudgingly gives him the 10 bucks.

Bill orders another beer and the bartender brings the beer with a scowl on his face. After Bill finishes the beer, he tells Jeff that he needs to relieve himself and suggests another bet. He bets Jeff $100 that he can climb up on the bar, pull down his pants, dance, urinate on the bar, and the bartender will gladly clean up the mess, laughing and smiling. Having seen the scowl on the bartender's face, Jeff can't imagine this happening so he accepts the bet.

Bill gets up on the bar, pulls down his pants, spins around a couple of times, and urinates all over the bar. The bartender is laughing and smiling and comes over to clean up the mess. Jeff pulls a hundred bucks from his wallet and asks Bill how he did it? Bill says that earlier in the day, he bet the bartender $50 that he could stand at one end of the bar, spin around twice, and piss into a shot glass at the other end of the bar without spilling a drop.

Do the banks have derivative bets? Are you going to know ahead of time how they have positioned themselves? Could they lose money on gold and make more money elsewhere?

Grover, you make a great point, these guys often have bets in other correlated areas that we don't know about, so things they do that may not make sense actually end up making them money overall. That is the flaw in my (simple) chain of logic and you found it!

At the same time, I'm trying to put the whole JPM futures positioning into a larger context; all their buying of gold too. What does it all mean? As a part of that, I'm reading up on what GOFO really means, and what it might imply.

Rather than suggesting its like the Shanghai premiums which indicates a shortage of gold in a particular geographical marketplace, I'm thinking the GOFO rates could be a sign of a directional shift in gold leasing behavior by the central banks. Imagine for a moment that the central banks are not manipulators in the sense of engaging in gold trading activity day by day, but rather engaging in long term gold leasing activity that ends up dropping more supply on the market over the months and years, which has the effect of both growing the money supply AND suppressing the price of gold over the long haul. (More supply = a cap on the price). Likely, they've done this since the 1980s.

Now suppose that central banks have decided to change their long term policy, and stop rolling over those gold leases - perhaps to repay Germany, or perhaps because the smaller central banks (Austria?) have decided to pull out of the leasing program. This would create a subtle bid under the market and it would cause bullion banks like JPM (who likely borrowed gold and then sold it, etc) to have to run out to the marketplace and buy it back. Not just as a one-time deal, but from now going forward.

Likely those leases won't all come due at once, but slowly, over time.

So GOFO may not be a signal of an impending default - it may simply be a signal that the standard central bank gold leasing policy is now happening in reverse, and the negative GOFO rates are that sign of a subtle pressure on gold supply that simply hasn't been there for - say - since the 1980s. Something that hasn't happend in the history of the timeseries.

And this change in policy may have encouraged JPM to go net long - perhaps even as a hedge for their short (leased) bullion position.

A bunch of "ifs" and "maybes." A work in progress.

Its not one of these things you can trade on, but it fascinates me nonetheless.

Trader Dan Norcini says that there isn't any backwardation in GOFO rates. He says that the reason there appears to be backwardation is because the out-month contracts aren't traded as frequently as the near-month contracts. When prices are increasing quickly, the near-months momentarily appear higher than the last out-month trade. When an out-month trade occurs, it reflects the current price plus a slight premium.

If central banks leased gold to keep the price lower in the past, why wouldn't they want to continue this practice now? Are they realizing that there isn't enough gold available to satisfy all the demands? Do they just want to get theirs back while they can? Does that mean that suppressing the price isn't important any longer?

Here is Kitco's Gold Lease Rates Chart. Rates haven't changed much in the last month. Would you expect rates to remain relatively static if the banks wanted to get gold back? I haven't followed this over time. It does seem that 0.55% for 1 year lease is much more expensive money than the Federal Reserve offers. What are your thoughts on this chart and the current rates? Do you have a chart showing rates for the last year?

The Gold Lease Rate (GLR) is the important thing to look at here, since it factors out current interest rates, showing only the net benefit to the lender of leasing gold over and above simply buying a treasury bond.

So, the Gold Lease Rate (GLR) is calculated as follows:

GLR = LIBOR - GOFO

And, GOFO = LIBOR - GLR

Since I don't trust LIBOR given all the bad press, I substituted the 6M US Treasury rate for my calculations used with the 6M GOFO rate.

During the 1990s, GLR was positive - often substantially so, and remained positive until about 2004.

Then from 2004-2013, GLR was negative.

Just recently, in July, GLR moved positive once again, but only modestly so.

According to all my reading, gold hedging by miners along with big leasing programs from central banks caused a significant amount of volatility in the GLR during the 90s, and it was largely responsible for the positive GLR during that time period. Miners closing their hedge books in the early to mid 2000s along with a reduction of central bank leasing caused the drop in the GLR, until it finally moved negative, where it largely stayed until recently. There was some serious volatility in the GLR during 2008-2009 crash timeframe where the GLR ranged from -15 to -1.5%, but it recovered soon after.

Now then, what about GOFO? And why did it go negative recently? Remember, GOFO = LIBOR - GLR. So if GLR rises above LIBOR, GOFO will go negative. And since LIBOR right now is absurdly low, it only takes a very small positive move in GLR for GOFO to plunge below zero. And GLR was very positive during the 90s. During that time, the 6M GLR was routinely above 1% for months to years at a time, and at times hit 3-6% on price spikes. Today LIBOR is 0.08%. If the GLR today was where it used to be in the 90s, GOFO rates would be very substantially negative - from -1% to -3%, depending on the market.

So I have to conclude that from a historical perspective, a mildly negative GOFO rate is really no big deal, given the absurdly low LIBOR we have today. The GLR turning positive like it was during the 90s is likely something interesting, but its no signal of impending doom.

Dan Norcini has suggested miners have increased their hedge books for the first time in a very long time as the gold price has dropped, trying to stay in business and lock in at least some profit for their operations. Perhaps this, along with changes in central bank activity caused the GLR to turn positive.

Thanks for the thoughtful response and explaining the relationships. Not bad for a jello-head. ;-) Your equations show that GOFO and GLR can be calculated from the other. Is either measure a more independent variable? In other words, is one of these variables the standard and the other just a calculated relationship or do they have equal footing?

It is interesting that the GLR was positive during the '90s when gold prices had a downward trend and that GLR was negative in the "oh-oh" decade when gold prices were on a significant uptrend. If miner hedging were the driver for this phenomenon, a positive GLR would imply that miners expect gold prices to generally drop going forward.

Granted, with LIBOR as low as it is, the positive GLR may not be significant. In the same light, the current slightly negative GOFO may not be significant either.

The Gold Lease Rate is calculated from two self-reported benchmarks: GOFO and LIBOR.

GLR = LIBOR - GOFO.

LIBOR, as we may know, is the self-reported interest rate that member banks "believe they can borrow" from other banks over a given time period (1-month, 6-month, 1-year, etc), averaged, manipulated as appropriate, etc.

GOFO is much the same thing; its a self-reported rate that member banks claim they are prepared to lend gold on a swap against the US dollar for a particular time period. Member banks that report this number include: The Bank of Nova Scotia–ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA London Branch, Goldman Sachs, JP Morgan Chase Bank, Société Générale and UBS AG.

GOFO rates are set at 11:00 GMT, LIBOR rates are calculated at 11:30 GMT, and all of it is based on voluntary reporting rather than actual transactions. One wonders if the GOFO rates are manipulated in the same way that LIBOR is.

What does it all mean? I think the amount of ink spilled on negative GOFO rates exceeds its importance. But that's just my sense based on my assessment of the historical numbers. I'm always looking for a smoking gun that would help me to get a real grasp on things; I'm not sure this is it.